The U.S. House of Representatives voted this week to advance the Holding Foreign Companies Accountable Act through Congress. The act requires Chinese companies to delist from major U.S. exchanges if they fail to comply with audit requirements of the Public Companies Accounting Oversight Board (PCAOB) within three years.
Andrew Karolyi, professor of finance at the Cornell SC Johnson College of Business and a decades-long expert on international listings of stocks, has written about the phenomenon of foreign firms leaving U.S. equity markets. He says the legislation may be part of a broader push by the U.S. to take a more assertive stance toward Beijing, but he also argues that there may be serious unintended negative consequences for investors as well as U.S. markets.
“Forced delisting of companies who have accepted the heightened scrutiny of a cross-listing on U.S. exchanges may be too blunt a tool to solve a problem that should have been addressed by some adept diplomacy between government agencies. There may very well be some Chinese listed companies on the NYSE and Nasdaq that should not be there and may not be able to withstand the requirements of the new bill. But their numbers may be greatly outweighed by the many other Chinese listed companies that are thriving in those markets to the betterment of their many U.S. shareholders and the markets that support them.
“Research has long shown that cross-listings of shares by foreign companies are associated with many positive benefits for companies and their shareholders, including enhanced liquidity in trading of the shares, expanded access to global investors, lower costs of capital for external financing, boosts in corporate valuations, and overall heightened global prestige.
“Major U.S. exchanges, like the NYSE and Nasdaq, have been the most attractive target market for companies from around the world on which to secondarily cross-list shares for three decades. The robust oversight in the U.S. of those companies’ mandated disclosures and governance practices is a unique feature of cross-listings targeting the U.S. – it is as significant a detractor to the many companies who seek to avoid such extra scrutiny as it is an attractor to those who choose to come to give additional assurances to their shareholders.
“The root of the current tensions lies over one decade back, well before the Senate’s unanimous support of the bill in May and yesterday’s vote in the House. The passage of the Sarbanes-Oxley Act in 2002 launched the PCAOB whose mandate was to increase reliability of the financial audits of companies whose stocks trade on U.S. exchanges. For one decade, PCAOB commissioners have been intensely negotiating with the Chinese Securities and Regulatory Commission (CSRC), China’s SEC, which has blocked the PCAOB from scrutinizing the Chinese accounting firms that audit the Chinese companies cross-listed on U.S. exchanges.
“Even compromise efforts to facilitate joint inspections by the PCAOB and CSRC have failed. Had such a compromise been achieved, the current Holding Foreign Companies Accountable Act would not have been needed.”
- 30 -